by the author of dead companies walking

Tag Archives: hedge funds

My week in New York finished out nicely with an appearance this morning on Opening Bell with Maria Bartiromo. We had a great conversation about performance in the hedge fund community, the state of the economy and the markets, and–of course–my book Dead Companies Walking.

Find the video below (or at this link if you are reading this on email.) I also had a good chat about the book and short-selling with TheStreet.com, which you can find here and Business Insider here.

Thank you again to everyone I met with this week and to everyone who has bought and read the book.

The talk of the investment world this past week has been the continuing soap opera at JC Penney. The latest installment has been the feud between board member and New York hedge fund manager Bill Ackman and just about everybody else within the company. Ackman, of course, was the one who convinced the board to hire former Apple retail guru Ron Johnson as CEO—a move that cost the company billions after Johnson disastrously tried to make the venerable retailer into some kind of glorified cross between Saks Fifth Avenue and Urban Outfitters.

After the company finally got rid of Johnson in May, Ackman agreed to bring back former CEO Mike Ullman on an interim basis. But that brief period of harmony vanished this week when Ackman publicly aired his displeasure with Ullman’s leadership. That move was the last straw for the board. They accepted Ackman’s resignation, calling his recent behavior “disruptive and counterproductive.”

Too which I say—”disruptive and counterproductive???” I know corporate boards tend to err on the side of decorum and blandness, but calling Bill Ackman “disruptive and counterproductive” to Penney’s is like calling an arsonist “disruptive and counterproductive” to buildings.

I shorted Penney’s seven months ago. It was a dead company walking then and I still believe it is a dead company walking today. And the person that mortally wounded it was the exact person who caused the latest trouble, Mr. Ackman himself. Ackman has been “disruptive and counterproductive” from day one at Penney’s, and even though he’s gone now, he’s left behind the torched shell of a once great company.

Two major events took place this past week in the financial world. First, news came out that finance is about to become the largest industry in the S&P 500 again. The last time that happened was May of 2008. We all know how that movie ended. Second, government regulators actually managed to, get this, regulate someone on Wall Street. They indicted the massive $14 billion SAC Capital hedge fund for insider trading “on a scale without known precedent.”

On the surface, these two news items seem unrelated. But, to my mind, they’re intrinsically linked–and not in a good way.

Taken on its own, you might think that an (allegedly) crooked hedge fund getting busted is the signal of better days to come on Wall Street, with more responsible money managers and more robust oversight. But with financial companies making up such a massive portion of our economic growth–without banks, the S&P’s profits would actually be down this quarter–I am not at all optimistic that the SAC indictment will lead to anything like the reform we need. Sure, the widely publicized case might hammer the hedge fund industry, which has already been taking plenty of lumps lately for underperformance. But it’s not going to get at the core problem that led to SAC’s downfall:

Wall Street has been living through its own steroids era. And both the SAC case and the resurgence of Big Finance show that it’s not even close to being over.

In my last post, I talked about the enormous fees mutual funds charge their customers. There’s no doubt about it: if you’re an individual investor, your best option is index funds. But if you really want to play the market yourself, beware of stocks with too-good-to-be-true stories. They almost always have sad endings.

I’ve seen countless investors get burned by “story stocks,” businesses with little else to their names but inspiring ideas. It’s even happened–indirectly–to me.

"[Scott Fearon's] insights on the common ways that mature companies often doom themselves apply equally well to start-ups. Every business, young or old, needs to avoid the ... mistakes that he outlines."

About the Author

Scott Fearon has spent thirty years in the financial services industry.
Since 1991, Scott has managed a hedge fund in Northern California that invests in fast-growing companies with little or no Wall Street coverage while shorting the stocks of distressed businesses on their way bankruptcy.